Thursday, February 28, 2013

With Ben Bernanke, Who Needs Conspiracy Theories?

Populist economic writer John Mauldin is contemptuous of conspiracy theorists. He writes, (bold mine)
I find the belief that there is a “Plunge Protection Team” simply bizarre. You know, the guys who are supposed to control the stock market? The “Working Group on Financial Markets”? If there is one somewhere, deep in the bowels of government, they are the most incompetent conspirators ever assembled. And no one has come forth and spilled the beans in a memoir after 25 years? Puh-leeze!
A conspiracy theory, according to, purports to explain an important social, political, or economic event as being caused or covered up by a covert group or organization.

On the other hand, the “Plunge Protection Team” (PPT) or otherwise known as the “Working Group on Financial markets” was created by ex US President Ronald Reagan via Executive Order 12631 which according to, “was used to express the opinion that the Working Group was being used to prop up the markets during downturn”. 

Of course, technically speaking the EO 12631 didn’t explicitly say direct control.

One of the main the stated purpose of the group according to the Federal Register 
Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and  

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(bold added)

In short, the US government can justify her actions to “carry out” “any of those recommendations that have the potential to achieve the goals” through opaque legal semantics.

So contra Mr. Mauldin, by edict, the Working Group on Financial Markets, a.k.a  PPT, is a legally constituted entity which therefore exists, unless a new edict has been made to repeal them.

As to whether or not this group represents “a conspiracy theory” is another matter.

And it would likewise be equally misguided to look into “the deep in the bowels of government” for attempts to control the stock and or financial markets. All one needs is to open one's eyes.


The above chart exhibits the tight correlation between the Fed’s balance sheet and the S&P 500 as I earlier pointed out

Have Fed policies not caused or contributed to the rising stock markets?

Last July, the New York Fed even bragged about how Fed policies has had “an outsized impact on equities relative to other asset classes” that has boosted returns by 50% as I earlier posted here.

Let us read directly from the incumbent Fed Chair Ben Bernanke, first when he still was in the academia: (bold mine)
There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
So Mr. Bernanke believes then that supporting the stock market has been a requirement for “smart” central bankers.

From Bernanke’s 2010 Jackson Hole speech on the Portfolio Balance channel (bold mine)
I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets…
So current policy has been meant to cause, if not influence, the “quantity and mix of financial assets held by the public.” Mr. Bernanke’s belief then has now been actualized through ZIRP and QE policies.

Two days ago Ben Bernanke on the wealth effect at the semi annual monetary policy report to the Congress (bold mine)
Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth--for example, through higher home prices--these developments have in turn supported consumer sentiment and spending.
In short, whether the stock and/or housing markets both of which constitutes household wealth, FED policies have been designed to control or to influence prices in support of these sectors.

Central bankers all over the world, in fact, has mimicked or assimilated the Greenspan-Bernanke doctrine.

In May of 2012 the Bank of Japan reportedly bought record amounts of ETFs. Central banks from Israel, South Korea and Czech Republic have jumped also into the stock market buying bandwagon. Whether as investment or as policy, government intervention on stock markets or financial markets serves to support them. 

Is this a conspiracy theory? Apparently not. Because such policies have become explicit (and not covert), from which again, the intent has been to cause or attempt to control prices of financial markets—as the stock and the housing markets—supposedly to promote the wealth effect theory. (In reality the wealth effect theory is a camouflage to advance the interests of welfare warfare state and the banking cartel whose relationship is underwritten by the US Federal Reserve)

In short, we don’t need conspiracy theories, the continued enforcement of Bernanke’s creed has been enough to tell those who are willing to listen that financial markets including the stock markets are being administered, managed or manipulated for political and secondarily economic objectives.

Wealth effect policies are, in reality, unsustainable asset bubble inflation policies.

Phisix: Another Marking the Close Day?

Just a few minutes before the closing bell today, suddenly the Phisix explodes to the upside!


chart from technistock

On a per sector basis, here is how the intraday trade looked like for today, February 28th











Mining and oil

(all charts from Citiseconline)

Except for Mining and Services sector, which have been up earlier than the rest, industrial, financial, property and holding companies had all been pushed up at the closing minutes.


So at the end of the day gains became lopsided in favor of the bulls or became broad based. (table from the PSE)

Some will rationalize this as end of the month so-and-so (blah blah) activities.

Peso volume today was substantial at Php 18.5 billion with about 60% coming from cross trades and special block sales. Foreign participation was a modest net selling at Php 951 million.

Nevertheless you just got to be amazed at how big money (could it be political money?) have been desperately “pushing up” the markets (chart from technistock)

Here is what I wrote last Sunday
Either way, yield chasing or politically motivated actions to artificially prop markets arrive at a similar conclusion: a policy induced mania.
Bottom line is that today’s move represents additional signs of brewing mania.

Ben Bernanke’s Best Inflation Record

Defending the US Federal Reserve's policy at the US Senate committee a few days back, Fed Chair Ben Bernanke says that he has the best tract record in terms of inflation.

From the CNBC,
In criticizing the central bank's easy monetary policy, Sen. Bob Corker, a Republican from Tennessee, called Bernanke the biggest dove since World War II.

Bernanke was quick to push back. "You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period – or at least one of the best," he said, citing the 2 percent average inflation rate.


What Mr. Bernanke refers to is the statistical inflation by the FED. (from

Yet what you see depends on the where you stand.

Here is another perspective of Bernanke’s best inflation record. (chart courtesy of Zero Hedge)


Statistical consumer price inflation may have been suppressed but commodity inflation has been the highest since he assumed the role as Fed chairman in 2006!

Some "best" record eh.

Quote of the Day: Elections Are and Always Mostly a Sham

Scholars have been slow to appreciate that elections are and always have been for the most part a sham – a mere ceremony intended to make people believe they have some control over their fate even as they are mercilessly bullied, bamboozled, and fleeced by their rulers.
This is from Robert Higgs’s 2004 volume, Against Leviathan; particularly from the “Escaping Leviathan?” as quoted by Professor Don Boudreaux at Café Hayek

Chart of the Day: Careers of Political Leaders

The Economist writes
A POLITICIAN, a businessman, a comedian and an economist walk into a room. Unfortunately, this is not a joke—they all vie for the position of Italy's next prime minister. At an election this week the politician received the most votes, but not enough to govern. A deadlock now ensues. The career background of Italy's previous prime ministers is similarly eclectic. Between 1973 and 2010, the two main jobs held by prime ministers before they came to power were split roughly equally between lawyer, professor, and politician or civil servant. Economists featured only three times out of 23. And elsewhere, prime ministers with an economics background are also rare.

According to a paper by Mark Hallerberg of the Hertie School of Governance in Berlin, and Joachim Wehner of the London School of Economics and Political Science, policymakers with "technical competence" are more likely to hold office during a crisis. The authors found that a banking crisis increases the probability of having an economist as prime minister; a professor is more likely to hold the position during stockmarket crashes or inflation crises. Italy's Mario Monti and Greece's Lucas Papademos are recent examples. Unfortunately, voters seem inclined to get rid of them at the earliest opportunity.
Let us see how such a theory applies to the Philippine setting.
The record shows that the civil servant and lawyer background played a significant role in the Philippines political system for a vast majority of Presidents.

However recent trends reveals of a change. Since 1986, the trend of Philippine presidents appears to have gone against the lawyer experience.

11th Philippine president Corazon Aquino had been a housewife to a popular politician Ninoy Aquino. Mrs Aquino rose to political prominence after the assassination of her husband, which resulted to the ouster of the Marcos dictatorship and her presidency. So this seems to go in contrast with the notion of "technical competence" holding political office due to a political economic crisis 

Another EDSA revolution figure, Fidel V Ramos, served as the 12th Philippine president had a career as military officer before ascending to the presidency. Mr. Ramos  graduated as a civil engineer and has a Masters in Business Administration in Business Administration for his educational background.

Popular film actor and 13th Philippine president Joseph Estrada has been a product of the Asian Crisis. 

Mr. Estrada’s career has mostly been as an actor and as local government official who rose through the national political scene. Mr. Estrada was ousted in January of 2001 in a popular revolution due to charges of corruption. Ironically, despite the EDSA II revolution, Mr. Estrada placed 2nd in the 2010 presidential elections

The Estrada election seems as another example that defies the study of the "technical competence" as post-crisis political leader.  Instead such reveals of the populist character of Philippine democratic politics.

I would think that this idiosyncrasies in elections is a country specific rather than generalized view.

The 14th and the 15th Presidents had “economics” as educational background. 

14th Philippine president Gloria Macapagal Arroyo, beneficiary of the EDSA II revolution, had been an academic economist prior to becoming a politician. She was vice president to the ousted Estrada. Ms Arroyo won the 2004 presidential elections that has been clouded by scandals.

While Arroyo’s former student, and the incumbent 15th Philippine president Benigno Aquino III graduated as Economics major, but whose career had mostly been as local official.

The economists backgrounds of two recent presidents are hardly due to political responses from post-banking crisis. I may say that the logic runs backwards. Two presidents with economic backgrounds may have increased the risks of an economic crisis by embracing bubble policies.
Rather, since the Philippine presidency has mostly been about the spur of the moment politics, I think that the recent non lawyer trend may have been a happenstance. 

Sidestepping the professor-economist experience, the lawyer, civil servant and celebrity career records remain a dominant force in Philippine politics.

Nonetheless the increasing role played by economists and university profession (this applies according to the study cited by the Economist) in the field of politics tell us why we should distrust mainstream experts, as their mostly statist views could have been motivated by the desire to enter politics or to obtain careers in political institutions or agencies.

Wednesday, February 27, 2013

Is the Euro Crisis Back???

All it seems to expose on the mirage of ECB Draghi’s jawboning communication strategy has been the recently concluded elections in Italy.

From Ambrose Pritchard of the Telegraph, (bold mine)
The Five Star movement of comedian Beppe Grillo, which won 25pc of the vote, has called for a euro referendum and has a return to the lira as one of its manifesto pledges, while ex-premier Silvio Berlusconi has threatened to pull Italy out of the currency bloc unless the EU switches to a reflation strategy.

Even if the centre-left leader, Pier Luigi Bersani, can put together a “grand coalition” with Mr Berlusconi, there is no going back to the hairshirt regime imposed by Mario Monti’s technocrat government at the EU’s behest over the past 15 months…

The great fear is that the European Central Bank (ECB) will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy could start to unravel.
Meanwhile, French Industry Minister Arnaud Montebourg has called for the ECB to work on the weakening of the euro through debt monetization.

Here is a noteworthy quote from Minister Montebourg from the same article: (bold mine)
“I am expressing personal sentiments here but the debate has started within the euro group on the euro being too strong and the role of the ECB,” he said. “We have to look at what’s going on the world. All central banks that are doing their job are doing it this way.”
The central banking inflation creed has been deeply embedded on the mindset of political agents and has become a populist political selling point.

Following Italy's elections, euro spreads have began to widen…

chart from Bespoke Invest


…as the euro and European stocks (Stox 50-lower and Dow Jones Italy-behind) plummeted. (charts from

And given the expressed desire to revert or “return to the lira” or switch to a “reflation strategy” or for a weakening of the euro from Italy’s politicians, as well as, from the French Industry Minister, this means the prospects of more inflationism…


And as I recently pointed out, the recent collapse of gold prices have been tightly linked with the contracting balance sheet of the ECB.

But such dynamics seems to have turned the corner or that the recent bounce of gold may signal or signify anticipations of more inflation from the ECB.

By closing 1.2% higher last night, Gold has reclaimed the $1,600 price levels, particularly at 1,612.

Like US counterpart, ECB’s Mr. Draghi seems to be boxed into a corner: either inflate or the lira will make a comeback.

Will current political developments in the Eurozone compel Mr. Draghi to relax on the strict conditionality he has imposed on crisis stricken nations in order to activate the yet to be tapped Outright Monetary Transactions, or OMTs?

We are living in interesting times.

Quote of the Day: Trust me, this time is different…

History shows there are always consequences to entrusting a paper money supply to a tiny handful of men. The French experiment is but one example. Our modern fiat experiment will be another.
Like the French, our politicians think this time is different. Our central bankers think they’re smarter. And they want us to trust them. After all, what could go wrong?

Ben Bernanke, a man who has expanded the Federal Reserve balance sheet by nearly 300% during his tenure as central banker, just wrapped up Congressional testimony downplaying the risks of his own money printing:

“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery…”

It’s also quite interesting that the Federal Reserve Chairman is discussing the ‘stronger’ economy, especially when by the government’s own numbers, US GDP contracted in the 4th quarter of 2012. Meanwhile the price of everything from food to fuel keeps getting higher.

Simultaneously, politicians in the US are racing to avoid imminent ‘sequestration’ budget cuts. They’ve created a problem caused by excess spending, and their solution is to ensure they can keep spending.

The French were in the same boat in the 18th century. During the time of Louis XV, no one could imagine how French society could possibly function if they cut the welfare system or defense budget. So they kept spending… kept going into debt… and kept debasing the currency.

We know what happened next.

The US already must borrow money just to pay interest on the money they’ve already borrowed. The political elite is dangerously out of touch. This time is not different. Assuming otherwise is really dangerous.
(bold original)

This is from Sovereign Man’s Simon Black

Tuesday, February 26, 2013

Does China’s Dubai Project Flop Signify as Signs of the Skyscraper Curse?

More signs of the China’s imploding property bubble. 

From the AFP (including above photo)

It was billed as China's Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country.

But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China's growing but sometimes unbalanced economy.

A "seven star" hotel is under construction on the wave-lapped oval, which the provincial tourism authority proclaims as a "fierce competitor" for the title of "eighth wonder of the modern world".

But the island stands quiet aside from a few orange-jacketed cleaning staff, with undisturbed seaside swimming pools reflecting rows of pristine white towers, and a row of Porsches one of the few signs of habitation.

Chinese manufacturers once snapped up its luxury apartments, but with profits falling as a result of the global downturn many owners need to offload properties urgently and raise cash to repay business loans, estate agents said.

Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.
Majestic, grand or ostentatious real estate projects usually highlight the peak of business or bubble cycles. Such has been called as the “Skyscraper curse” as I pointed out in 2009. The rest of Asia, including ASEAN has also been exhibiting the same symptoms

The Skyscraper curse or Skyscraper syndrome, notes Austrian economics Professor Mark Thornton signifies as the “salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase.”

It is unclear if China’s Dubai episode has merely been a localized problem.

Instead I would see this as signs of the bursting of her internal bubbles occurring at the periphery which may be in the process of spreading to the core, as explained this weekend.

So far, recent government interventions such as stealth fiscal stimulus and monetary easing has only deferred on the day of reckoning or managed to kick the can down the road.

Yet despite such political actions, China’s retail sales reported rose at the smallest pace in 4 years, and February posted a slump in manufacturing.

Again as noted this weekend, last week China moved to withdraw some of the recent fund injections, as well as, imposed new restrictions on property sales, that may have rattled China’s stock market aside from global commodity markets.

It remains to be seen if China’s political authorities would have the gumption to allow markets to clear that would come with significant economic anguish that may translate to heightened socio-political risks for the incumbent leaders.

My bet is that once the slowdown will become evident anew, policymakers will be quick to reverse on any tightening recently made and flood the system with money. Such has been the du jour policy convention.

Monday, February 25, 2013

Even in the Short Term, Abenomics Fumbles

Cheerleaders of Japan’s PM Shinzo Abe’s aggressive economic policies known as “Abenomics” say that devaluing the yen would produce the “solution” required to revive her economy. I say that this represent no more than wishful thinking that relies on tooth fairy.

After the yen’s 7% loss against the US dollar since the end of 2012 (as of Friday’s close), “Abenomics” hardly seems to have delivered on its vaunted promises of increasing “competitiveness”.

From Bloomberg,
Exports climbed 6.4 percent in January from a year earlier, the first rise in eight months, exceeding the median 5.6 percent estimate in a Bloomberg News survey of 24 economists. Imports increased 7.3 percent, the Finance Ministry said in Tokyo today.

Weakness in the yen that aids exporters such as Sharp Corp. and Sony Corp. also means the country pays more to import fossil fuels needed as nuclear reactors stand idle after the Fukushima crisis in 2011. That burden may encourage the government to limit the currency’s slide, with Deputy Economy Minister Yasutoshi Nishimura signaling in a Jan. 24 interview that the government may prefer a yen stronger than 110 per dollar.


"Abenomics" has, so far, only worsened the trade and current account balance of Japan (charts from which amplifies the risks of her overleveraged government. To cover such deficits, Japan's economy would now require more foreign capital. Japan seems on path to a banana republic.

More from Dr. Ed Yardeni at his blog,
The immediate consequence of his browbeating the central bank was a 16.9% plunge in the yen since September 27. The catch is that 18% of Japan’s exports go to China, where components made in Japan are assembled into final products. That could lower the input costs to Chinese manufacturers and increase their competitiveness. Higher import prices in Japan could depress consumers' spending by lowering their purchasing power. By far the biggest catch is that Japan’s numerous governments have tried massively stimulative fiscal and monetary policies for over two decades that all obviously failed to work. 
While the benefits of inflationism are usually on felt on the short term, in Japan’s case, it hasn’t.

Yet, whatever supposed boon accrued from the loss of the yen’s purchasing power has largely been offset or neutralized by other factors such as higher import costs and reduced capacity by consumers to spend.

As the great Ludwig von Mises warned,
The much-talked-about advantages which devaluation secures in foreign trade and tourism are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.


So far what the crumbling yen has generated has been an artificial money inflation fueled boom in her stock markets. 

The Nikkei has been up 9.53% as of Friday’s close. However a foreign investor invested in Japan would see his returns at only 2.53%, net of the losses from the yen, while taking on greater risks from the potential setbacks from the political desire to combust price inflation.

The Economist Buttonwood columnist Philipp Coogan rightly noted of the growing risks from Abenomics…
Abenomics is targeting higher inflation. But does the government really know what will happen if inflation hits 3-4%? Hard to believe that the Japanese public will want to own 20-year government bonds yielding 1.75%. At current interest rates, Japan spends 25-30% of its tax revenues on debt payments; what would happen if yields double or treble? The effect would dwarf any improvement in tax revenues that would flow from a revived economy.
Again in politics, common sense has hardly been common.

At the end of the day, the real intent of the yen’s devaluation has been to provide subsidies or transfers of wealth to the banking, insurance and finance industry that will come at a great cost to Japan’s citizenry via a credit event or a currency run.

Quote of the Day: The Folly of All for One

And is not this the point that we have now reached? What is the cry going up everywhere, from all ranks and classes? All for one! When we say the word one, we think of ourselves, and what we demand is to receive an unearned share in the fruits of the labor of all. In other words, we are creating an organized system of plunder. 

Unquestionably, simple out-and-out plunder is so clearly unjust as to be repugnant to us; but, thanks to the motto, all for one, we can allay our qualms of conscience. We impose on others the duty of working for us. Then, we arrogate to ourselves the right to enjoy the fruits of other men's labor. We call upon the state, the law, to enforce our so-called duty, to protect our so-called right, and we end in the fantastic situation of robbing one another in the name of brotherhood. We live at other men's expense, and then call ourselves heroically self-sacrificing for so doing.
(italics original)

This is stirring quote, posted by Café Hayek’s Prof Don Boudreaux, is from Frederic Bastiat‘s 1850 treatise, Economic Harmonies  based on 1964 W. Hayden Boyers translation. Chapter 12, paragraph 21

Has the Phisix has Gone Ballistic?!

14.66% in 8 straight weeks of unwavering ascent has truly been spectacular!!


Whether parabolic or vertical, the Phisix seems to have gone ballistic.

February has already racked up 6.8% with this week’s 2.2% gains. Yet there are still four trading days to go.

As I said last week, should 7% return per month persist, then the Phisix 10,000 will be reached within the second semester of this year.

Again I am NOT saying it will, but we cannot discount the likelihood of such event, considering what appears to be the deepening of the manic phase in the Philippine Stock Exchange. 

Signs of Mania: Friday’s Marking the Close

I highlighted this week’s actions (via red ellipse) because of what appears to be a botched attempt by the Phisix to correct.


In what appears to be a sympathy move with US markets which closed lower Thursday, on Friday, the Phisix has been down through most of the session, by about 1.5% (chart from technistock). That’s until the last few minutes before the closing bell window, where the losses had precipitately been wiped out to close the day almost unchanged (or a fraction lower)

Whether what seems as “marking the close” has been another attempt “manipulate” the Phisix for whatever ends (I would suggest political), or that bulls have taken the opportunity to conduct a massive counterstrike against the bears, such refusal to allow for a normal profit taking mode simply has been an expression of the intensifying du jour bullish frenzy.

Net foreign activity posted marginal selling last Friday (Php 36 million). Index heavyweights exhibited mixed performance in terms of foreign activity, which may suggest that local buying could have been mostly responsible for the last minute rebound.

To boost the Phisix means to bid up major blue chip issues. This requires heavy Peso firepower that can emanate mostly from institutions rather than from retail participants, regardless of nationality, whether foreign or local.

The scale of actions from Friday reflects on either hugely expanded risk appetite or the increasing symptoms of desperation to chase momentum from so-called professional money managers, or that parties responsible for Friday’s action could have been conducted by largely price insensitive taxpayer financed institutions.

Yet given the current election season and perhaps the desire to generate upgrades in the nation’s credit rating in order to justify political spending binges, one cannot discount on the potential influences played by public institutions in the stoking of today’s frenetic markets.

To elaborate, marking the close is the practice of buying a security at the very end of the trading day at a significantly higher price[1] is considered illegal by Philippine statutes[2]. Although personally speaking, I consider insider trading[3] and related rules and regulations as arbitrary, repressive, unequal and immoral form of laws.

For instance, the legality or illegality of what appears as “marking the close” could depend on the identity or of the class of executor/s. If public institutions may have been involved, then I doubt if such regulations will apply or will be enforced. Such rules get activated only when there has been a public outcry or when authorities want to be seen as doing something or when used for assorted political goals.

Either way, yield chasing or politically motivated actions to artificially prop markets arrive at a similar conclusion: a policy induced mania.

Mounting Publicity Hysteria

Of course, the manic phases are essentially reinforced through public’s psychology. The public has been made to believe that prices represent reality which tells of the perpetual extension of such boom. Such resonates on the mentality that “this time is different”: the four most dangerous words of investing, according to the late legendary investor John Templeton
Hysteria about the boom phase has been building up.


This Bloomberg article entitled “Philippines Trounces Global Stocks in Aquino-Led Rally[4]”, even sees the current rally as “structural”.

I wonder how valid will the “structural” foundations of this bull market be when faced with significantly higher interest rates.


Nevertheless it is a fact that the Philippines have “trounced” the world in terms of returns.

In my radar screen of the equity benchmarks of 83 nations, on a year-to-date basis Venezuela’s Caracas Index has been on the top of the list, with an astronomical 31% nominal currency gains which essentially compounds on 2012’s stratospheric 302%.

Yet as I have repeatedly been pointing out[5], what seem as rip-roaring stock market gains are in fact an illusion.

Venezuela has most likely been suffering from seminal stages of hyperinflation, where the stock market becomes a shock absorber or a lightning rod of a massively devalued or inflated currency. Venezuela’s recent official devaluation by 32% has only triggered a steeper fall in the unofficial rate of her currency, the bolivar.

The official rate has been recently readjusted to 6.3 bolivar per US dollar, but the black market for the bolivar trading has been trading at around 22 per US dollar[6] from 19 less than two weeks back[7]. As typical symptom of hyperinflationary episodes, Venezuela has been suffering from widespread shortages of goods.

Venezuela’s skyrocketing stock market from hyperinflation has been reminiscent of Zimbabwe in 2008. In 2008, as the world plumbed to the nadir as consequence to the contagion effects from the US housing bubble bust, Zimbabwe became the top performer, nominally speaking.

Yet Kyle Bass, a prominent hedge manager, captures the zeitgeist of such a boom[8] (italics added)
One of the best performing equity markets in the last decade has been Zimbabwe. But now your entire equity portfolio only buys you three eggs.
Yes, thousands of percent in returns buys you three eggs.

This shows how stock markets, as surrogate or as representative of real assets, serve as refuge to monetary inflation. This has been especially elaborate at the extremes—hyperinflation.

This also implies that monetary inflation, which has been neglected by the mainstream, plays a very important role in establishing price levels of the equity markets.

Outside Venezuela, the rest of the top ranked equity bellwethers have been far beyond their respective nominal record highs. This makes the local equity bellwether, the Phisix, the likely global crown holder or the current world champion. The Manny Pacquiao of international stock markets. The $64 trillion question is its sustainability.

From Friday’s close, the Phisix has been up 256% since the last trading day of 2008. This translates to around 35% CAGR.


Even among the top ASEAN peers, from a 5-year perspective or from a starting point in mid-2008 from the Bloomberg chart, the Phisix [PCOMP: red orange] has outclassed by a widening margin, Thailand [SET: Green], Indonesia [JCI: orange] and Malaysia [FBMKLCI: red].

So the feedback loop between prices and media cheerleading entrenches the public’s belief and conviction of the flawed views of realty. Such perceptions translate to actions: more debt.

Bubble Mentality Leads to Bubble Actions

As I have pointed out last week, manias signify as the stage of the bubble cycle where the yield chasing phenomenon has become the prevailing bias. Manias are essentially underpinned by voguish themes unquestioningly embraced by the public and most importantly enabled, facilitated and financed by credit expansion.

I pointed out how the booming stock markets have reflected on the growing imbalances in the real economy of the Philippines

The stock market boom has similarly been reinforced by the expansion of credit at exactly where such imbalances have been progressing: property-finance-trade, or simply, the property-shopping mall-stock market bubble.

Such extraordinary growth in credit may have already percolated into the domestic money supply 


The monetary aggregate, M3 or as per BSP definition[9], constitutes currency in circulation, peso demand deposits, peso savings and time deposits plus peso deposit substitutes, such as promissory notes and commercial papers, has jumped by 16.22% in 2012. From 2008 CAGR for M3 has been at 11.51%.

On the other hand, M0 or narrow money or as per[10], the most liquid measure of the money supply including coins and notes in circulation and other assets that are easily convertible into cash, spiked by 24% in 2012, which on a 5 year basis grew by 13.2% CAGR.

Although there have been many intermittent instances of peculiar outgrowth, such outsized move appears to be the largest.

Moreover, it remains to be seen if this has been an anomaly.

If this has indeed been an aberration, then this implies that the coming figures should show a decline which should revert M3 and M0 back to the trend line. If not, recent breakout may establish an acceleration Philippine monetary aggregate trend line: an affirmation of the classic bubble.

Considering that both the private sector, lubricated by expansionary credit, and the domestic government, whom will undertaking $17 billion of public works spending, will be competing for the use of resources, we should expect that pressures to build on either relative input prices (wages, rents, and producers prices), particularly on resources used by capital intensive industries experiencing a boom, and or, but not necessarily price inflation.

Such dynamics would exert an upside pressure on interest rates that would eventually put marginal projects, including margin debts on financial assets operating on leverage, on financial strains which lay seeds to the upcoming bust.

Yet the idea that price inflation is a necessary outcome of an inflationary boom has been misplaced.

In the modern economy, many things such as productivity growth, e.g. informal economies and or technological innovation) or today’s financial quirks, e.g. as excess banking reserves held at the central banks, such as the US Federal Reserve, can serve to neutralize its effects.

As the great dean of Austrian school of economics Murray N. Rothard wrote[11],
Similarly, the designation of the 1920s as a period of inflationary boom may trouble those who think of inflation as a rise in prices. Prices generally remained stable and even fell slightly over the period. But we must realize that two great forces were at work on prices during the 1920s—the monetary inflation which propelled prices upward and the increase in productivity which lowered costs and prices. In a purely free-market society, increasing productivity will increase the supply of goods and lower costs and prices, spreading the fruits of a higher standard of living to all consumers. But this tendency was offset by the monetary inflation which served to stabilize prices. Such stabilization was and is a goal desired by many, but it (a) prevented the fruits of a higher standard of living from being diffused as widely as it would have been in a free market; and (b) generated the boom and depression of the business cycle. For a hallmark of the inflationary boom is that prices are higher than they would have been in a free and unhampered market. Once again, statistics cannot discover the causal process at work.
Nonetheless, while price inflation may not be the necessary and sufficient factor for upending a boom, the lack of its presence does not prevent business cycles from occurring.

Moreover, the yield chasing boom will likely spur greater demand for credit that will similarly put pressure on interest rates.

In addition, competition for resources by both the government and the private sector will likely increase demand for imports that subsequently leads to wider trade deficits. Eventually bigger trade deficits may impact the current account that could put pressure on foreign exchange reserves.

And as noted last December[12],
And since the prolonging of the domestic boom requires foreign capital or that trade deficits would need to be offset by capital accounts or increasing foreign claims on local assets, either the BSP loosens up or keeps an eye closed on foreign money flows. Most of which will likely come from hot money inflows seeking refuge from inflationism and financial repression.
By then the Philippines could be vulnerable to “sudden stops” which may arise from a domestic or regional if not from a global event risks.

And as pointed out last week, today’s global pandemic of bubbles will most likely alter the character of the next crisis.

Instead of many nations offsetting bursting bubbles of some nations, the coming crisis would translate to a domino effect.

Wherever the source or origins of the crisis, the leash effect means cascading bubble implosions over many parts of the world. The escalation of bubble busts would prompt domestic political authorities to intuitively embark on domestic bailouts and fiscal expansions (or the so-called automatic stabilizers), and for central bankers to aggressively engage in monetary easing for domestic reasons—or a genuine “currency war”.

In contrast to what seems as phony “currency wars”, real currency wars have had broad based carryover effects from expansionist political controls. This usually includes price and wage controls, capital and currency controls, social mobility and border controls, trade controls or protectionism and other financial repression measures[13] (e.g. taxes, regulations on banks, nationalizations, caps on interest rates, deposits and etc…).

How inflationism leads to forex controls and the spate of other political controls, the great Ludwig von Mises explained[14]
But the government is resolved not to tolerate any rise in foreign exchange rates (in terms of the inflated domestic currency). Relying upon its magistrates and constables, it prohibits any dealings in foreign exchange on terms different from the ordained maximum price.

As the government and its satellites see it, the rise in foreign exchange rates was caused by an unfavorable balance of payments and by the purchases of speculators. In order to remove the evil, the government resorts to measures restricting the demand for foreign exchange. Only those people should henceforth have the right to buy foreign exchange who need it for transactions of which the government approves. Commodities the importation of which is superfluous in the opinion of the government should no longer be imported. Payment of interest and principal on debts due to foreigners is prohibited. Citizens must no longer travel abroad. The government does not realize that such measures can never "improve" the balance of payments. If imports drop, exports drop concomitantly. The citizens who are prevented from buying foreign goods, from paying back foreign debts, and from traveling abroad, will not keep the amount of domestic money thus left to them in their cash holdings. They will increase their buying either of consumers' or of producers' goods and thus bring about a further tendency for domestic prices to rise. But the more prices rise, the more will exports be checked.
In short, one form of interventionism breeds other forms interventionism.

For now, the domestic yield chasing mania means an increasing pile up on winning trades.

And instead of the rotation to the mining sector as has been for the past years, the latter of which has been smacked by a double black eye from the Semirara landslide and from the recent blowup in metal prices, dampened appetite for the mines has shifted the public’s attention back to the last year’s biggest winners.

The trio: property, financial and banking and property weighted holding firms has reclaimed their leadership positions.

Thus the checklist for the manic phase of stock market bubble:

Deepening price or yield chasing dynamics √
Popular themes √
This time is Different mentality √
Expansionary credit √

Every Bubble is a Thumbprint

And it’s not just me.

One analyst from the S&P credit rating agency recently raised his concern over Asia’s growing appetite for debt where he says many Asia-Pacific countries have raised debt “well above the levels in the mid-2000s”, importantly, credit to GDP ratios of few nations has been “high relative to peers at similar income levels”

S&P KimEng Tan at an interview with Finance Asia further adds[15],
Real estate downturns may be less of a threat to financial institutions in the key economies than they were in the worst-hit developed economies. Nevertheless, credit losses can still increase rapidly if general economic conditions weaken materially. The top concern is that China’s growth could slow sharply before the developed economies recover sufficiently to contribute to maintaining moderate growth. The slowdown is likely to have a material negative effect on economic activities across the Asia-Pacific.
Although the seemingly disinclined Mr. Tan downplays the imminence of the risks of a crisis by making apple-to-orange comparison with debt levels in Europe.

Let me improve by saying that each nation have their own unique characteristics or idiosyncrasies, therefore it may not be helpful to make comparisons with other nations or region. Moreover, while many crises may seem similar, each has their individual distinctions.


For instance, one Bloomberg article I came about highlights the portentous troubles that lie ahead for Asia. The article[16] relates on the symptoms: South Korea’s household debt “rose to a record 959.4 trillion won last quarter”, and equally such debt has “reached 164 percent of disposable income in 2011, compared with 138 percent in the U.S. at the start of the housing crisis”.

South Korea’s domestic credit provided by the banking sector[17] (shown above), as well as, domestic credit to the private sector[18] as % of has reached over 100% GDP, although slightly below the recent peak.

China’s mounting debt problem and property bubble has also been daunting. Recent easing and government intervention via stealth spending programs[19] has prompted a recovery in housing prices. According to a Bloomberg report[20] (italics mine)
Average per-square-meter prices in 100 cities tracked by SouFun are five times average monthly disposable incomes.
In addition,
Home sales in China’s 10 biggest cities almost quadrupled to 8.5 million square meters in the first five weeks from last year, property data and consulting firm China Real Estate Information Corp. said in an e-mailed statement Feb. 19.
Either China and South Korea’s productivity growth has to catch up with the lofty levels of debt or that untenable debt dynamics will eventually lead to self-destruction whether triggered by an upsurge in interest rates or by weakening of the economic conditions or from a global contagion or simply unsustainable debt.

Interventions can only delay the day of reckoning but worsen the longer term entropic impact.


These are debt levels when “credit events” occurred via the Asian Crisis (left window) and of the other emerging market debt crisis (right window). Data from Harvard’s Carmen Reinhart as presented by Ricardo Cabral at the[21]

First, there has been no definitive line in the sand for credit events. South Korea has for instance very low external debt when the crisis struck, although Argentina’s debt crises shared the same debt levels during 2 crises within 10 years.

Second, external debt may or may not function as an accurate gauge today. Many economies have resorted to amassing debts based on internal local currency units and from local currency bond markets which has been unorthodox relative to the past.

In addition, financial innovation may mean risks have spread to other potential channels as securitization and derivatives.

Nonetheless, external debts have indeed been swelling in Philippines, Thailand, Indonesia and even in South Korea with the exception of Malaysia.

The implication is that there are many potential sources of black swan events.

The Wile E Coyote Moment

Yet the current booming environment has been prompting policymakers of several economies to pull back on current easing programs. 


The Chinese government has recently withdrawn funds from the financial system. In addition, the Chinese government has recently ordered more property curbs[22]. Such perception of tightening has prompted for a 4.86% plunge in the Shanghai Index (SSEC) over the week, which reverberated throughout the commodity markets (see CRB line behind SSEC).

Prior to February, Chinese authorities were loosening up on the monetary spigot, then all of a sudden the change of sentiment. As one would note, this is an example of how markets has been held hostage to the actions of authorities.

Of course it is also important to point out that the European Central Bank (ECB) has been draining funds from the system since October of 2012 which has coincided with the peak in gold prices. February’s dramatic shrivelling to March lows of the ECB’s balance sheet has mirrored the collapse in gold prices[23].

And it’s not only the ECB.

Swiss banks have been required only this month to up their capital reserves by 1%.

And in the face of credit fueled property boom in Europe’s richer nations as Switzerland, Sweden and Norway, Sweden’s regulators have warned that they are ready to tighten more given the recognition of a brewing debt bubble. “Swedish households today are among the most indebted in Europe” the Bloomberg quotes a Swede official[24].

Meanwhile, Hong Kong’s government has doubled sales tax[25] on high end real estate worth HK$2 million and above, as well as, commercial properties in her attempt to suppress bubbles that has spread from apartments to parking spaces, shops and hotels

As one would note, wherever one looks there have been blowing bubbles: a global pandemic of bubbles

So contradicting policy directions can became a headwind and increased volatility for financial markets, including the Phisix. Although domestic dynamics are likely to dictate on momentum.

Nonetheless bubbles eventually peak out regardless of interventions.

Again in Hong Kong, prior to the sales tax hike, bankruptcy petitions has risen to 2 year highs[26]

Things operate or evolve on the margins. And so with puffing bubbles. Deflating bubbles always commences from the periphery that eventually moves into the core.

The US housing bubble cycle should serve as a noteworthy paradigm.

US home prices represented by the National Composite Home Price Index peaked (lower window blue line) at the close of 2005, as interest rates increased (red line). The Fed controlled Fed fund rate topped in 2007.

Notice that the mild descent of home prices in 2006 steepened or accelerated in 2007. The housing bear market fell into a trough only in 2011 and began showing signs of recovery in 2012.

Yet the US stock market (S&P 500 blue line top window) continued to ignore the developments in the housing markets in 2006-2007, as well as, the interest rate hikes. In fact, gains of the S&P seem to have accelerated when interest rates peaked. 

The stock market came to realize only of the flawed perception of reality when home prices affected the core, or when the banking and financial system began to implode. It was like cartoon character wile e coyote running off a cliff.

From hindsight, the divergence between housing and the stock market, the massive debt buildup on the housing, mortgage, banking and financial sectors, the denial by authorities of the existing problem, the transition of deflating bubbles from the periphery to the core and the public’s persistent yield or momentum chasing dynamics, all meets the criteria of a manic phase in motion.

But as I said last week, the next crisis may not be similar to the US housing crisis of 2008.

Then policymakers have been mostly reactive, today policymakers are pro-active, pre-emptive and considered as activists. The outcome isn’t likely to be the same.

Importantly, given that almost every nations have been serially blowing bubbles, a domino effect from a bubble bust would either mean the path to genuine reform (bankruptcies and liberalization) or more of the same troubles but in different templates (stagflation, protectionism, controls of varying strains and etc…). I am leaning onto the latter outcome, although I am hoping for the former.

Everything now depends on the Ping Pong feedback loop between markets and international policymakers.

Although from the lessons of US bubble, I believe that the Phisix in spite of several increases in interest rates may go higher.

Momentum will initially mask the traps that have been set, until of course, economic reality prevails; eventually. Or going back to wile e coyote analogy, wile e coyote will continue to chase after Road Runner to the cliff until he realizes that there is no more ground underneath.

Again bubbles signify a market process.

[2] Republic of the Philippines Security Exchange Commission Chapter VII Prohibitions on Fraud, Manipulation and Insider Trading

[6] Wall Street Journal Ailing Chávez Returns to Caracas February 18, 2013

[8] Kyle Bass Why Inflation Could Eat Into Stock Gains: Kyle Bass Klye Bass Blog February 1, 2013


[11] Murray N. Rotbhard Part II The Inflationary Boom: 1921-1929 America’s Great Depression

[13] Financial repression

[14] Ludwig von Mises 6. Foreign Exchange Control and Bilateral Exchange Agreements XXXI. CURRENCY AND CREDIT MANIPULATION, Human Action

[21] Ricardo Cabral The PIGS’ external debt problem, May 8, 2010